CBDT chief: Changes to I-T regulation have large income implications

THE AMENDMENTS made within the Income Tax Act to disallow cess and surcharge as deductions retrospectively from evaluation 12 months 2005-06 may have “huge” income implications, two senior finance ministry officers stated. The officers informed The Indian Express that the retrospective nature is as a result of the tax division wished to insert the clarification from the date of the introduction of the cess within the Act, they stated. Health and training cess is levied at 4 per cent of the tax quantity.
“Revenue implication will be huge. It’s not a question of litigation. The intent has to be clear. If you are convinced that it is not an expenditure that is why it has been brought in. This was the conviction that cess could never have been allowed as an expenditure. For good legal reasons,” Central Board of Direct Taxes (CBDT) Chairman JB Mohapatra informed The Indian Express.

Making a retrospective modification to the Income-tax Act from 2005-06, the Budget clarified that cess and surcharge is not going to be allowed to be claimed as deductions within the type of expenditure. Citing court docket rulings, the tax division stated the retrospective modification is being accomplished to appropriate the anomaly of cess and surcharge not being seen as part of tax.

“…there is retrospectivity in the Bill but one has to read the context in which the retrospective provision has been kicked in here. The department strongly feels at the time of the presentation of the Bill that cess can never be part of an allowed expenditure. That’s the reason the conviction in this case is unanimous — cess could never have been allowed as an expenditure. This is at the Bill stage, there will be a lot of discussions among people who are proficient in this area. We will get a considered view after the discussions are over. But this retrospectivity in Section 40 is very different contextually from the retrospectivity in section 9. Let me clarify that,” Mohapatra stated.

The change is being introduced from AY 2005-06 as training cess was launched by the Finance Act, 2004. “This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years,” the Budget paperwork acknowledged.
Officials famous that although the modification has been worded as retrospective, its primarily geared toward clarifying the legislative intent, and can influence a handful of taxpayers and firms who’re in dispute with the tax division.

“It is not retrospective, it’s just a clarity. This is there in dispute. Already the assessing officers have told them (taxpayers) that they have to pay tax on it. In few cases, it has gone to the Courts. This can never be the intention that the tax payable can itself be expenditure,” Revenue Secretary Tarun Bajaj stated.
“It’s not retrospective taxation. It basically shows the intent of the legislature right from the beginning,” Bajaj careworn, including that the federal government is saying don’t misread the intent of the laws. It will influence solely few assesses who’re in dispute. “If this thing comes out, it’s a huge amount, 4 per cent (cess as percentage),” he famous.

The court docket rulings differentiated between earnings tax and training cess on earnings tax, and in absence of a particular disallowance for ‘education cess’, courts had taken a view useful for taxpayers in lots of instances. In order to nullify the impact of such Court rulings and take into account such rulings towards the intention of regulation, a clarificatory modification has been launched in earnings tax regulation, offering that any surcharge or training cess on earnings tax shall not be allowed as enterprise expenditure.

The Budget has additionally made adjustments to the I-T regulation making area for questioning by the tax division to clarify the supply of funds by the hands of the creditor. This may have an effect on funding of companies, particularly startups, if the creditor just isn’t a enterprise capital fund, a enterprise capital firm registered with SEBI.

Mohapatra stated this modification has been introduced since laundering and layering was being noticed for sources of funding.
“The operating section is section 68 about unexplained cash credits. If the amount in books of accounts is coming from tainted sources, then the department can ask, and can get satisfied whether the funding in your books is from right sources or illegitimate sources. Then we can make the investigation and tax it in the hands of the one who has received it. In the case of private companies, the provision was that in case of share capital, share premium and share application money, we can go behind that credit and we can ask source of source in those cases. Now we have expanded to include loans, borrowings, we can have that source of source verification. This is required in the context that there are plenty of situations in the field where there is huge layering when it comes to funding and laundering of illicit money,” he stated.

“The nature and the source and legitimacy of a typical lump of money cannot be answered by looking at the first source. We have to look at the second to third to fourth to fifth (source). They layer the amount, cash will be generated at one point, and the banking channels will be routed and cheques will be from another source. Very difficult situation for the investigators and there are entry providers, those who exchange cheques for cash. So just to prevent the whole of the tax economy also getting contaminated because of these kinds of layering tactics, that is why source of source verification is also we thought would be required for loans and borrowings, not just the capital and share application money,” he stated.